macro e conomics unit 4: price stability and inflation some idea of inflation comes from seeing a...
TRANSCRIPT
MACROEconomicsUnit 4: Price Stability and
Inflation
Some idea of inflation comes from seeing a youngster get his first job at a salary you dreamed of as the culmination of your career.
- Bill Vaughan
Created:2012
by Jim Luke.This work is licensed
under the Creative Commons Attribution-
NonCommercial License
MACROEconomics
Society's Goals for Macro System
GrowthStable Prices & Money
Full EmploymentStability of Business Cycle
MACROEconomics
Money: an elastic measuring stickMoney: an elastic measuring stick
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MACROEconomics
Inflation is a sustained and generalized increase in most prices.
Money loses real value Most observed (nominal)
prices are rising
MACROEconomics
The Inflation Rate is the % change (annual rate) in most prices as measured by a price index.
MACROEconomics
Deflation is a generalized decrease in most prices.
MACROEconomics
Disinflation is a reduction in the rate of inflation.
MACROEconomics
Terms:
- Nominal Prices: actually observed
- Real Values: estimated value of goods using “base year” prices.
MACROEconomics
Inflation erodes financial wealth and fixed incomes.
MACROEconomics
But inflation also helps debtors and owners of real wealth.
MACROEconomics
Hyper-inflation Can Destroy.
MACROEconomics
Deflation Is Very Undesirable (any amount of deflation)
MACROEconomics
Practical Policy Goal: Low, stable inflation.
MACROEconomics
Measuring Price Stability
“Price Index”: wtd average of sample of pricesSeveral Price Indices
CPI PPI GDP Deflator
Index Number: base year = 100
Inflation Rate = % increase in the Price Index each year
MACROEconomics
Measuring Inflation Rate requires a price index.
MACROEconomics
A price index establishes price levels relative to an arbitrary “base year”.
MACROEconomics
Price Index: wtd average of prices based upon comparing the cost of “market basket” of goods each year.
MACROEconomics
Inflation Rate = percentage increase from year-to-year in price index
MACROEconomics
There are a lot of different price indices such as CPI, GDP Deflator, PPI, and Billion Prices Project.
MACROEconomics
Price indices are imprecise due to quality changes, new products, and shifts in preferences.
MACROEconomics
Inflation needs “momentum”, not just isolated increases. Attempts to measure it use “core inflation”.
MACROEconomics
What causes inflation? More demand in general than supply.
MACROEconomics
Nominal Interest Rates include a “real rate” component and an implied/assumed future inflation rate.